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Balancing Act

Vladimir Putin sternly told Russia's Parliament last month that the Kremlin was launching a drive to "stamp out corruption." Forgive the management of Motorola for cracking a wry smile. The company has discovered the hard way that, in Russia, following the rules isn't quite enough to stay on the right side of the law.

When a shipment of 167,500 Motorola mobile phones worth $19 million was confiscated at Moscow airport in March, police initially told bewildered Motorola reps that Customs duties hadn't been paid. Then the authorities changed their story, the company says. The phones were allegedly emitting unsafe levels of radiation, police claimed, and 50,000 handsets had been destroyed on health grounds. When the company produced a sheaf of certifications showing that its product was safe, a mysterious Moscow-based company filed suit that Motorola was in breach of a Russian patent--and demanded money for allowing the company to distribute its products in Russia.

The last straw came this spring, when execs discovered that the phones confiscated by Customs last year were being dumped on Moscow's thriving black market, depressing over-the-counter sales for Motorola's Russian partner, Evroset. (Evroset estimates that it has lost $200 million since last August to what it calls state-sponsored theft.) Angered, Motorola went to Washington to protest vigorously that Russia shouldn't be allowed to join the World Trade Organization while its Customs service was full of racketeers. According to a Western diplomat in Moscow, that message was "passed loud and clear" to Putin, who desperately wants a deal on the WTO before next month's G8 summit in St. Petersburg.

Heads are now rolling. In recent weeks the director of the Federal Customs Service, Aleksandr Zherekhov, and three generals from the Federal Security Service, or FSB, were fired, plus two generals from the Prosecutor's Office and five senior Interior Ministry officers. More, the long-serving Prosecutor General Vladimir Ustinov abruptly resigned after a brief chat with Putin in the Kremlin. Some, at least, were allegedly involved in the Customs scam, according to company officials and Russian media reports.

Score one to Motorola, justice and the American Way? It would be nice to think so. But as always in Russia, there's a back game and a front game. For sure, Putin cares about making Russia work, and that means cracking down on the corruption that threatens to choke the economy in red tape and kickbacks. But the back game is more dangerous and subtle--and, ultimately, more important to Putin than pleasing the United States or even joining the WTO. Putin's main priority is to ensure a smooth succession by a chosen political heir when he steps down in 2008. That in turn means keeping a fine balance between the political clans who run Russia. Of late, one of those clans--the "siloviki" faction of FSB and military men who constitute the Kremlin's hard-liners--has been getting a little too powerful. High time, Putin decided, to "cut the siloviki down a little, not destroy them," says Aleksei Makarkin of Moscow's Center for Political Technologies. The president's new anticorruption campaign provided a convenient tool for doing just that: a chance to remove selected political opponents, while trimming the balance of power at the top of Russia's most influential ministries.

To anyone who does business in Russia, it's clear the place desperately needs a cleanup. Transparency International rates Russia as the world's 126th most corrupt country, tied with Sierra Leone and Niger. Ustinov himself warned, just before his ouster, that "corruption is endemic in the highest levels of our law-enforcement organs and our political establishment." At the same time, Putin's making a lot of the right moves to put the economy on a decent footing, such as holding down inflation and boosting currency reserves--and is not afraid of administering unpopular but necessary reforms. Just last week he introduced a plan to charge market prices for electricity, a step toward modernizing the country's state-run utility industry.

Putin's bigger problem, though, is that the liberal economic reformers in his cabinet (Economy Minister German Gref and Finance Minister Aleksei Kudrin) have been losing power to their siloviki rivals, some of whom have been linked to the sort of corruption troubles plaguing Motorola and other companies. Chief among the siloviki is the deputy head of the presidential administration, Igor Sechin, whose daughter happens to be married to Ustinov's son. Sechin recently wrested control of Russia's notoriously corrupt Customs away from Gref and his technocrats. Sechin may also be behind the banning of the CEO of the country's biggest foreign investor, William Browder of Hermitage Capital, according to some Western finance experts in Moscow--a controversy that has focused yet more unwelcome scrutiny on Russia in the run-up to the G8, and which the Kremlin's liberal faction has decried. (Browder's offense? Lobbying for more transparency in murky companies owned by Sechin allies.)

Other powerful siloviki clansmen have taken over large chunks of Russia's economy, including most of the Yukos oil company as well as the auto and aerospace industries. This in itself doesn't bother Putin. (And after all, some of his liberals are no less rapacious in appointing themselves to lucrative positions in state-owned companies.) His chief concern is more political. For Putin, says former deputy prime minister Boris Nemtsov, the bottom line is to make sure that his feuding Kremlin clans remain evenly balanced so that he, not they, will be in a position to choose his successor--in his own good time, and on terms that he can dictate.

The president's new anticorruption campaign yields other political benefits for the Kremlin as well. It's no accident that two early victims of the cleanup campaign, arrested and charged last month with fraud and embezzlement, were a pair of inconveniently independent regional leaders--Aleksei Barinov, the politically wayward governor of the oil-rich Nenetsk Autonomous Area in northern Siberia, and Volgograd Mayor Evgenii Ishchenko, who refused to join the Kremlin-dominated United Russia party. It's a neat trick: justice is seen to be done, and at the same time potential opponents are silenced.

The question now is, who will replace Ustinov? As the Kremlin's hatchet man, he played a key role in bringing down Putin's nemesis, Yukos CEO Mikhail Khodorkovsky, as well as previous oligarchs who challenged the Kremlin. Loyalty will count high with Putin--but so will competence in executing the new anticorruption campaign, however selectively. The front-runner at this point is Dmitry Kozak, the president's special representative in the troubled Caucasus. A former prosecutor from Putin's native St. Petersburg, he has a reputation for ruthlessness--and not being afraid to step on powerful toes to get his way. "Kozak will probably move to Ustinov's place at the table," says Kremlinologist Olga Kryshtanovskaya. "Ustinov was not loyal enough."

As far as the back game is involved, Kozak is probably a natural. But for the front game--dealing with the serious problem of corruption in high places--troubles abound. "This is not about a few individuals," says former KGB lieutenant-colonel Gennady Gudkov, now a member of the Duma's Security Committee. "It's a deep systemic problem." Putin won't be able to stop the rot until he's willing to put corruption out of bounds to his Kremlin allies, not just its enemies. And that requires more than a balancing act.